LIVE MARKETS-Humans vs Computers: "In search of a new equilibrium"

11 Min Read

* European shares hit six-month low
* Follows steepest declines on Wall Street since 2011
* But European stocks stage partial recovery
* Energy stocks see biggest rebound vs market open
* Euro STOXX volatility set for biggest one-day gain since 2001
Feb 6 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Danilo Masoni. Reach him on
Messenger to share your thoughts on market moves: danilo.masoni.thomsonreuters.com@reuters.net
HUMANS VS COMPUTERS: "IN SEARCH OF A NEW EQUILIBRIUM" (1133 GMT)
Systematic funds, which use computer models for their trading strategies, are being blamed
for the violent spike in volatility and the global equity sell-off we're seeing,
but fund managers that use their skills in finding good buying opportunities may eventually have
the upper hand, as confidence in the macro and micro fundamentals remains unscathed.
Here's how a trader sees it: "It is going to be a battle in search of a new equilibrium
between deep pockets bottom pickers (rationale: macro/micro picture unchanged) and more
systematic supply (volatility shock driven) for at least a couple of days, maybe the rest of the
week..."
(Danilo Masoni)
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CS: EQUITY SELL-OFF A "VOLATILITY" EVENT (0947 GMT)
Credit Suisse's Michael O'Sullivan says the worst U.S. sell-off since 2011 is not about
fundamentals, but is largely a "volatility" event: momentum investors who were short of
volatility were forced to cover those positions.
"So far the selling seems to be concentrated in quant-centric funds, and there are few signs
that more long-only investors are panicking," says O'Sullivan, Chief Investment Officer at
Credit Suisse's International Wealth Management division.
"Trading will be choppy for the next few days, but with volatility having gone from being
very low, it is already very high now and may soon be trading lower," he says.
CS has begun to position for a world where inflation is picking up due to strong growth, by
adding inflation-linked bonds to its portfolios, says O'Sullivan. CS is also underweight Italian
equities and government bonds ahead of a March election.
(Tom Pfeiffer)
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LONG EUROPE: "THIS CORRECTION IS A BUYING OPPORTUNITY" (0911 GMT)
Natixis strategists are staying calm and maintain a positive stance on European equities,
saying the current correction is creating a buying opportunity and bigger volatility could lead
to a greater divergence with U.S. assets.
European shares have already narrowed opening losses with the STOXX 600 down 1.6
percent -- less than half the 4 percent declines seen on Wall Street yesterday.
"It seems that the much-heralded interest rate rise has finally started. This is justified
in the United States, in view of the inflation news flow (given the acceleration in wages in
particular), the monetary policy tightening and the return of U.S. risk (increase in the fiscal
deficit). But it is less justified in the Eurozone, where interest rate levels seem excessive,"
Natixis says.
"These developments are leading to a resurgence of volatility and point to greater
divergence between U.S. and euro assets," they add.
(Danilo Masoni)
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VIEWS FROM THE STREET: MELT-UP TO MELT-DOWN (0858 GMT)
Big brokers are getting their head around the sell-off hitting world markets; here are a few
of their views.
"We have not sensed panic among equity investors, but nervousness has been building for the
past few weeks," writes RBC, saying a pullback may have been overdue.
Yet "For now, we are buyers on the dip," the Canadian bank's strategists say, adding their
constructive view on equities was not dependent on further multiple expansion.
"Economic pessimism is not behind the selloff," write strategists at Bespoke Investment
Group.
Pointing to the recent surge in EPS estimates, they argue "this is about fair value coming
down rather than earnings... that makes spillover effects (higher implied vol, implications for
rates) much less of a concern; asset prices can only get so disjointed from recent levels before
a bottom is found and equilibrium restored."
JP Morgan's Marko Kolanovic points out a "massive divergence" between strong fundamentals
and equity price action. "Rapid sell-offs, such as the one today, can also be followed by market
bounce backs as liquidity gets exhausted by programmatic selling," he wrote.
Indeed, U.S. stocks futures have just turned higher and are trading up 0.5 to 1.1 percent,
indicating a potential relief bounce on Wall Street.
(Helen Reid)
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EUROPE AVOIDS WORST OF U.S. SHARE FALLS FOR NOW (0823)
The plunge in U.S. stocks came mostly late in the day after Europe closed but right now the
Stoxx Europe 600 index is down 2.6 percent, less than the Dow's 4.6 percent
slump.
A buy signal?
Unicredit strategists say the increased volatility in technology stocks - which have been
instrumental to the surge higher in U.S. equities - means euro zone equity indices, with their
higher weighting of traditional industrial stocks and financials, "should finally start to
significantly outperform the U.S. stock market".
They caution however that the "increasingly late-cycle environment", especially in the U.S.,
makes euro zone equities vulnerable to short-term shifts in sentiment.
(Tom Pfeiffer)
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OPENING SNAPSHOT: SEA OF RED IN EUROPEAN STOCKS (0812)
Europe's main benchmarks are down 2.7 to 2.9 percent with the FTSE down 2.5 percent. They
are, however, holding up relatively well compared to the more than 4 percent slumps on Wall
Street yesterday.
The STOXX 600 is set for its worst day since the Brexit vote and its worst
seven-day fall in two years.
Cyclical sectors are leading the plunge, with oil & gas, autos, and basic resources stocks
the worst-performing. Financials, the stars of the New Year rally, are the biggest weight on the
STOXX with Credit Suisse among the worst fallers, down 5 percent.
Some $4 trillion has been wiped off global equities in this sell-off, and counting:
UNWIND OF SHORT VOLATILITY PLAYS SHAKES MARKET (0739 GMT)
With the VIX shooting up in U.S. trading, its biggest one-day jump in more than two
years, investors are rushing to unwind big positions in ETF products shorting the VIX and take
out options protecting themselves against a further slide in stocks.
Our colleagues in New York reported overall VIX options volume hit 3.6 million contracts, or
about three times the daily average.
The VelocityShares Inverse VIX short-term ETN sank 86 percent and the ProShares
Short VIX short-term futures ETF fell nearly 80 percent. Investors said the inverse ETF
products may be liquidated after suffering these heavy losses.
Credit Suisse, the issuer of the VelocityShares inverse ETF, is seen down as much
as 10 percent at the open, according to a trader.
The UBS VelocityShares VSTOXX inverse ETF, which shorts the European volatility
gauge, plunged 21 percent yesterday in New York.
(Helen Reid)
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"WE'RE IN UNCHARTED WATERS" (0729 GMT)
As we've seen European stock futures are pointing to heavy losses at the open and investors
are trying to make sense about what could come next, as inflation worries have pushed Wall
Street's volatility index to its highest since August 2015.
"Price action is clearly driven by technical factors, tied to a brutal awakening of stock
volatility," said Alessandro Balsotti, head of asset management at JCI Capital Ltd.
"We are undoubtedly in uncharted waters," he adds.
"The first instinct as an asset allocator is to take advantage of this dip to add equity
exposure. Also to exploit the decline in yields to further reduce duration... Ultimately I think
the robust economic phase will be able to withstand the bloodshed on volatility. The real danger
for 2018 remains that the transition from a deflationary mentality to an inflationary one
will... not be simple at all for the market and investors," he said.
(Danilo Masoni)
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EUROPEAN STOCK FUTURES PLUMMET (0710 GMT)
European equity index futures have opened down sharply confirming earlier indications from
financial spreadbetters for declines of around 4 percent.
Here's your snapshot:
(Danilo Masoni)
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EARLY MORNING EUROPEAN HEADLINE ROUND-UP (0644 GMT)
Corporate news is unlikely to have much impact today as investors prepare for broad sell-off
at the open that could see top European stock benchmarks fall as much as 5 percent. Anyway here
are the main headlines we've seen this morning:
BNP Paribas Q4 profits dip, yet bank signals more confidence on 2020 targets
EXCLUSIVE-British wind project draws investment heavyweights - sources
Bayer offers to sell businesses to win EU approval for Monsanto deal
Swedbank Q4 net profit tops forecast
Activist Elliott steps up calls for BHP to scrap dual listing
Apple supplier AMS's Q4 profit soars thanks to sensor technology
Banks in Britain and U.S. ban Bitcoin buying with credit cards
Infrastructure fund GIP offers 1.9 bln euros to buy railway group Italo
Terra Firma kicks off sale of Italian solar assets - sources
MEDIA-Accor nears sale of stake in real estate arm- FT
BRIEF-Safran To Hold 79.74 Percent Of Zodiac Following Tender Offer - AMF
Brazil's EMS and India's Torrent Pharma vying for Sanofi's generic drugs -sources
Belgian business urges Lufthansa not to merge Brussels Airlines with Eurowings
Lockheed, Rheinmetall team up to bid for German helicopter order
Intesa Sanpaolo releases results, business plan; announces full conversion of saving shares
(Danilo Masoni)
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MORNING CALL: EUROPEAN SHARES SEEN PLUMMETING AT THE OPEN (0614 GMT)
Good morning and welcome to Live Markets.
European shares are set to fall sharply at the open after a rout in global equities deepened
in Asia on Tuesday and Wall Street suffered its biggest decline since 2011 as inflation worries
gripped financial markets in a vicious sell-off.
"The weakness has continued in Asia with the Nikkei225 bearing the brunt with its worst fall
since 1990, and is set to spill over once again today into European trading with another sharply
lower open for European stocks, as nervous investors continue to bail out," said Michael Hewson,
Chief Market Analyst at CMC Markets UK.
Here are your opening calls:
FTSE100 is expected to open 275 points lower at 7,060 -3.7%
DAX is expected to open 682 points lower at 12,005 -5.3%
CAC40 is expected to open 260 points lower at 5,025 -4.9%
(Danilo Masoni)
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(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)